South Africa's trading environment and FTA prospects with China

The , and in particular how these relationships may be advanced by the adoption of a free trade agreement (FTA) between South Africa (or, more properly, the Southern African Customs Union agreement (SACU)) and China and India respectively. The TRALAC book[1] starts with a section that carefully outlines the background as to the reason for the need to examine the trading relationships with China and India and to stress that continually exploring ways of enhancing these relationships is important. Crucially, the global trading environment is a rapidly changing one – notwithstanding the apparent abeyance of the World Trade Organization (WTO) and its Doha Development Agenda (DDA) round – with virtually all countries in the world actively involved in bilateral and regional negotiations in some form or other. These groupings of interest include South Africa itself and the complex relationship that it has under the terms of the SACU agreement of 2002.

Reinforcing the need to look east for South Africa to enhance its ‘South–South’ trading relationships is the evidence that the book presents showing the data contained in the version 7 Global Trade Analysis Project (GTAP) model database. This data is predicated upon strong gross domestic product (GDP) growth in both China and India through to 2020, and in turn this results in (or is driven by) dramatic increases to Chinese and Indian global trade shares. Conversely, the economies of both the European Union and the United States continue on sluggish growth paths. While tempting to refer to the EU and the US as ‘old’ economies, we suggest that it is the ‘really old’ economies of China and India which have dominated global GDP for at least three-quarters of the previous two millennia that are making steady progress in retaining their positions! An update at June 2009 of the GDP predictions suggests that while growth predictions may have declined for all economies, the relative strength of China has, if anything, been accentuated.

Usually in an FTA analysis the emphasis is on the partners directly concerned. In this case that means China or India on the one side and South Africa on the other. However, given some important factors this FTA analysis needs to be much wider than just a direct two-party analysis. Firstly, the complex institutional relationship that South Africa has with its SACU partners means that SACU must be consulted and considered. Secondly, we acknowledge that China in particular is not recognised as a priority agricultural market for South Africa, but that SACU is actively involved in trade discussions with India. Next, we are aware of the complexities and sensitivities surrounding the textile and clothing imports from China into South Africa, and, finally, given the energetic and strategic manner in which competitor countries are positioning themselves in the massive Chinese and Indian markets, that South Africa must take cognisance of these competitors.

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More specifically, the opening section of the book outlines the South African trading environment and sets:

- South Africa’s trade, and especially agricultural trade, in an historical perspective
- South Africa’s overall trading environment and policies in a regional and global perspective relating to trading agreements
- China’s and India’s bilateral and regional FTA relationships, and how they relate to South African competitors and potential competitors, in perspective.

To assist with this analysis the internationally accepted benchmark GTAP global computer model is used as the analytical tool, and in recognition of the relationship between South Africa and its fellow SACU members of Botswana, Lesotho, Namibia and Swaziland (BLNS), the analysis includes (but does not report upon, other than in general terms) the other SACU countries.[2] For China the programme starts from the base of an FTA between South Africa and China and then sequentially examines the different defensive and offensive alternatives vis-à-vis the strategy of competitor countries. Next the focus is on the agricultural sectors followed by the increasing importance of non-tariff barriers (NTBs) as constraints to trade – a scenario where reductions in NTBs for South African imports into China are reduced is presented. This results in welfare gains that are double the baseline FTA scenario results. For India we use the standard GTAP analysis, but concentrate upon the scenario that abolishes all tariffs on both sides except those on gold imports into India. Fully liberalising gold imports into India from South Africa gives results which we consider to be unrealistic.

CHINA

China has become an increasingly important trading partner for South Africa. For the year ending in the third (September) quarter of 2007, China was the second main supplier of imports (behind Germany) and the sixth main destination of exports (behind the US, Japan, ‘unallocated’, Germany and the UK). General and electrical machinery dominates the imports of US$2,356 million, while ores and slag and mineral fuels dominate exports to China. Analysis shows that: a) the reported trade heavily favours China and; b) the exports are more concentrated than the imports. However, data reconciliation between Chinese import data and South African export data shows that there are reasons for the apparent differences – meaning the imbalance is not as large as it seems.

China and South Africa (SACU) have mooted entering into a free trade agreement (FTA), although there is a degree of apprehension in South Africa about such an agreement. We use version 7 of the GTAP database to assess the welfare and trade gains from the FTA, as determined by merchandise goods access only. The results show that there are comfortable welfare gains to South Africa of $295 million, or 0.21 per cent of real GDP. Negating these are the labour market-related losses to South Africa, where employment falls by 0.13 per cent and the real wage declines by 0.37 per cent, but where at the same time the Consumer Price Index (CPI) declines by 0.86 per cent. These latter changes are a function of the unskilled labour market closures used in the model, so, although indicative, they raise distributional concerns about an FTA with China. The gains to South Africa come from enhanced allocative efficiency and capital allocation in the economy, while losses come from labour-related losses and terms of trade that go against South Africa.

Scrutinising the results reveals that South Africa does gain modestly in the agricultural sector. Enhanced agricultural exports to China of $136 million are concentrated in vegetables and fruit products in primary agriculture and ‘other foods’ in processed agriculture. These increased exports are dominantly ‘new’ exports or trade creation rather than ‘current’ exports or trade diversion away from other destinations. Increased agricultural imports are minimal.

The big action is in the manufacturing sector, where increased manufacturing imports from China are some US$5,493 million, although some US$3,569 million of this is trade diversion away from other sources (leaving new or trade creation imports of a much lower US$1,924). Nearly 40 per cent of these enhanced imports from China are in the textile, clothing and leather (footwear) sectors (TCF), with around half of these TCF imports ‘new’ trade. Output in the apparel sector reduces by a massive 42 per cent as a result of preferential access. Other increases in manufacturing imports from China are spread across all sectors, but with ‘machinery’ the largest single increase outside of TCF. Trade diversion away from other suppliers rather than new imports is more evident outside of the TCF sectors.

Balancing this Chinese intrusion is the fact that manufacturing exports to China increase by US$644 million, and even better exports here increase by US$955 million to other destinations as the South African economy becomes more competitive. This gives an increase of US$1,428 million in global manufacturing exports. These increases are concentrated in chemicals, plastics and rubber, non-ferrous metals, vehicles, general machinery and ‘other manufacturing’.

An alternative scenario is presented whereby a reduction in the non-tariff barriers (NTB) facing South African imports into China is simulated by effectively assessing these barriers equivalent to tariffs of between two and five per cent. The welfare gains for South Africa more than doubled (to US$697 million) with virtually no change to China’s large welfare gains. Importantly, this NTB scenario results in large export increases to China (indeed, almost doubling them overall) with very minor changes in imports. The welcome effect on labour markets is the reduction by half in both employment losses and declines in real wages.

As an extension of this section on the GTAP analysis we introduced a note on a more detailed examination of the FTA results using sector-specific South African models to answer different questions. GTAP is the appropriate model to analyse trade flow between different regions in the world, while the BFAP Sector model illustrates what an FTA means for the sugar farmers and mills in South Africa, and the PROVIDE model shows the relative shift in factor demands and wage rates due to a change in economic activity at a detailed regional and household level using grapes and apples as case studies.

NON-TARIFF BARRIERS

As international tariffs are being reduced, increased attention is being given to the role of non-tariff barriers (NTBs) in impeding trade flows. In many cases these NTBs have been there all the time, but as the tariff barriers have been high, trade has not been extant, and therefore the NTMs have not been visible. In other cases ‘creative’ new barriers are being erected to replace the role of tariffs in protecting markets. Either way, the net result is the same: NTBs are important as they are restricting trade.

Recognising that the estimates we used for simulating NTBs in the Chinese market, TRALAC extended the recent research paper of Sandrey and Edinger with another survey of exporters to identify these NTBs facing South African agricultural exporters to China. This survey found that the biggest non-tariff barriers that South African exporters face when exporting to China are:

- Sanitary and phytosanitary requirements – strict SPS standards and high protocol on fruit quality which are viewed by exporters as being unnecessary, and the lack of a phytosanitary agreement between China and South Africa which is resulting in indirect shipments to Hong Kong via the gray channel not following the direct route to China.
- Cold chain sterilisation requirements where products are subjected to very long periods of cold treatment which can arguably damage the quality and the shelf life of the product, and the costs associated with these requirements that are extremely high and increasing.
- We also found that perhaps cultural differences do not receive enough attention. This is of course a cost of doing business and not an NTM as such, but more emphasis needs to be placed on this factor.

THE DATA UPDATE

The objective of this section is to update the trade data between South Africa and China through to the end of March (quarter 1) 2009. The source is the World Trade Atlas data, with both Chinese and South African data used. Figure 1 shows the reported South Africa quarterly trade data expressed in millions of US dollars over the period of the first quarter of 2004 through to and including the first quarter of 2009. South African imports from China have been consistently above South African exports to China over the period. Imports steadily increased through to US$2,817 million during the third quarter of 2008 before declining to US$1,895 million in the first quarter of 2009. Exports to China were flat through to the fourth quarter of 2006 before increasing to US$1,454 million during third quarter of 2008, before falling sharply and then recovering.

Figure 1: South African trade data for China, US$ million

Centre for Chinese Studies at Stellenbosch University.

NOTES
[1] This book 'South Africa’s way ahead: Looking East' is available at www.tralac.org under 'publications' in either electronic form or a hard copy by request.
[2] Ron Sandrey and Hans Grinsted Jensen, 2009 ‘SACU, China and India: the implication of FTAs for Botswana, Lesotho, Namibia and Swaziland (BLNS)’ tralac Working Paper No 1, 2009 at www.tralac.org under ‘Publications’ then 'Working Papers’.